We have initiating our coverage on The Blackstone Group LP (BX) with a long-term ‘Neutral’ recommendation. The company’s diversified revenue mix and footprints, continuously falling expenses along with steady growth in assets under management (:AUM) will likely supplement future growth. However, we remain concerned about the impact of a volatile capital market and slow realization of performance fees.
Blackstone is an asset manager of alternative investments and a provider of financial advisory services. Founded in 1985, the company has offices globally. Further, the company has been an active acquirer.
In the past few years, Blackstone has completed the acquisitions of GSO Capital Partners, Harbourmaster and Vivent Inc. Further, in September 2012, the company signed a deal to acquire Capital Trust. We believe that the company will continue with its inorganic growth strategy to further strengthen its top line.
Blackstone has strong organic growth prospects. We believe that the company’s diversified products and revenue mix will enable it to adapt easily to the changing needs of the clients. Further, given Blackstone’s superior position in the alternative investments space, we anticipate continuous AUM growth and consequent improvement in its top line.
At a time when most of the industry peers like Invesco Ltd. (IVZ) and Franklin Resources Inc. (BEN), among others, are facing increased expenses, Blackstone has been witnessing decline in total expenses without resorting to any cost reduction initiatives. We believe improving operating efficiency would aid bottom-line growth in the upcoming quarters.
On the flip side, Blackstone’s asset management operations mainly depend on the commitments from the investors of its alternative investment funds. During the financial crisis, the company’s financials deteriorated due to the low level of new commitments as the investors were shying away from market linked investments. Further, once the financial reform laws related to capital markets are implemented, they would limit the ability of Blackstone to raise funds from banking institutions.
Further, approximately 56% of Blackstone’s total revenue in 2011 was generated from management and advisory fees. The increased dependence on one revenue source could adversely impact the company’s financials in the near term, if there is any change in the managed assets, regulatory changes or a slowdown in business activities.
Blackstone currently retains its Zacks #2 Rank, which translates into a short-term Buy rating.
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